Family-owned businesses have traditionally been multi-generational. For decades the default assumption was that the next generation would eagerly step up and provide family continuity in the business. That dynamic is changing. These days, the next generation typically does not join the family business. For several years, PwC’s Annual U.S. Family Business Survey has shown a declining trend in the percentage of family business owners who expect the next generation to own or manage the business.
Now, instead of hearing “Wow, I can’t wait to start; where’s my office?” owners of family businesses are increasingly confronted one of the following scenarios:
- “Sounds good, but let me get some outside experience first.”
- “I’m really not interested and would rather forge my own path.”
Harsh Reality
This second scenario is becoming more of the norm, especially as millennials who may consider the family business as ‘legacy’ or having an outdated business model, often prefer to establish their own professional credentials and career paths. Adult children, particularly those who are well educated, have the benefit of broad outside perspectives, are technology savvy, and may have different entrepreneurial aspirations, are increasingly looking for a career outside the family business. Today, millennials have a much larger set of career options than earlier generations.
It’s no longer safe to assume that children will move up into the family business, and family business owners may have to compete harder to recruit the next generation into a family business structure.
Given the increasing likelihood that members of the next generation are not planning to join the family business, at least not in the near term, owners need to devote time to set up a business succession plan and frame a clear transition strategy.
Unfortunately, children may demur from making their preferences known until they graduate from school and are ready to enter the business world. This can be problematic for business owners, who have an obligation to frame a succession plan and transition strategy and, to do this in a prudent timeframe and ahead of critical deadlines.
Connect Early and Often
Family business owners who want to bring the next generation into the fold should speak frankly with their kids about their interests as early as possible. Consider informal apprentice programs where children can learn more about the business and get familiar with operations across the enterprise. As the kids get older and more competent, these programs can shift from an observational role to hands on. This allows the current generation to assess their talents and skill sets and allows the next generation to build confidence.
If, as college students, members of the next generation pursue courses of study that do not complement the family business, this may signal that they have no intention of joining the business after graduation. Sometimes this realization can develop gradually after they’ve been involved in the business for a while; over time they decide the family business is not the right fit for them.
It may be worthwhile asking children who have expressed little or no interest in managing the family enterprise – or who simply do not have the requisite skills and aptitudes – whether they would be willing to retain ownership shares or serve in a Board capacity while having other professionals manage day-to-day operations. If that’s not feasible, then you may want to consider an outside buyer.
Transition is a Plan, not an Event
If it becomes obvious that passing the business to the next generation is not feasible, then allow yourself ample time to develop and implement a transition plan, manage succession dynamics and the financial and tax considerations of selling the business. PwC’s 2021 U.S. Family Business Survey suggests that only one-third of the businesses have a robust, documented and communicated succession plan in place. It’s widely acknowledged that succession planning will be a major challenge for business owners in the next five years.
Preparing a large or complex business for sale can take considerable planning. In some cases, the nature of the business and its related assets may mitigate against a traditional exit. In cases where owners pass away prematurely, the lack of a succession plan often places the enterprise in a strategic vacuum and increases the risk that the business will degrade.
Valuation
Irrespective of whether you intend to groom members of the next generation to run the business or sell to a third party, a professional valuation of your business is integral to any succession plan or exit strategy. This is especially important because many family businesses may be marginally profitable but generate strong cash flow or have valuable non-operating assets.
Most business owners would benefit from working with a team of specialists (e.g., attorney, accountant and financial advisor) to help frame critical decisions regarding business continuation, transition or sale and preservation of family wealth.
Separate Business from Personal
Operating a family business is a matter of great pride to the owners, and it can hurt to hear that the next generation is not interested in following in their footsteps. It’s important to keep things in perspective and remember that while the business may not pass down to the next generation, family bonds will endure.
Conclusion
If you own a family business and fall into the category of business owners (two-thirds of family business owners) who do not have a succession plan in place, try to make that a priority in the next several months. Whether speaking with members of the next generation or starting the conversation with a team of trusted advisors including your accountant, financial advisor and business attorney, take action to define your options and document your plans. For more information about how our attorneys counsel our clients on business matters, including advising family business owners, click here. Call us at 781-235-5500 or contact us to make progress on succession planning for your family business. We welcome the opportunity to speak with you.
This article is not legal advice and should not be taken as such or relied upon as legal advice.